From the December 01, 2009 issue of Futures Magazine • Subscribe!

Next step for OTC regulation

Over-the-counter (OTC) derivatives regulation got one step closer to reality when the House Agriculture Committee passed its bill on regulating OTC transactions on Oct. 21. The bill would institute a clearing requirement for swaps and security-based swaps and provide exemptions from the clearing requirement for commercial end users who are not swap dealers or major swap participants. It also would require cleared, listed swaps to be traded on exchanges and allow the Commodity Futures Trading Commission (CFTC) to impose position limits on swaps and the Securities and Exchange Commission (SEC) to impose limits on security-based swaps. The House Financial Services Committee approved a similar bill to regulate OTC derivatives on Oct. 15.

Speaking at the Futures Industry Association’s (FIA) annual conference on Oct. 21, CME Group Executive Chairman Terry Duffy said he would like Congress to move quickly on its reforms but said the push for position limits has already caused market participants to move out of the
U.S. markets.

Kevin McPartland, senior analyst at Tabb Group, doesn’t think position limits will force U.S. business overseas. “There is some level of harmonization between the U.S. and regulators in Europe. They’re trying to not create a situation where there’s a lot of regulatory arbitrage. The regulations, although different, won’t be [so] extreme in one jurisdiction that you’ll be forced to move to the other,” he says.

And nothing is final. “We’re a long way from the finish line in terms of what actually gets enacted,” says Daniel Waldman, partner, Arnold & Porter LLP. “Its impact on the market will depend on the details of what passes Congress and gets signed into law and how the regulators implement it. The key questions are going to be, how broad is the mandate for clearing, how broad are the incentives for exchange trading, and who’s going to be captured by the regulatory scheme.”

McPartland says dealers and major market participants will feel the biggest impact from regulatory changes. “In the long run, the new legislation will be for the good for the parts of the market that it touches, but it’s going to be complicated,” he says.


After many meetings throughout the fall, the SEC and CFTC released their report on harmonization on Oct. 16, responding to a request from the Obama Administration. Recommendations in the report include facilitating portfolio margining, a call for legislation for the expediting of new product approvals, stronger authority for the CFTC on exchange and clearinghouse compliance with the Commodity Exchange Act, and requirements for foreign boards of trade to register with the CFTC. The report also calls for operational coordination between the agencies, including the formation of a Joint Advisory Committee and Joint Agency Enforcement Task Force to share market surveillance data.

At the FIA conference, Chicago Board Options Exchange Chairman Bill Brodsky said that while the harmonization study is well written, it doesn’t answer many of the questions that the Treasury originally asked for about where regulation should go next.

Like the legislation, the when and ifs of the recommendations are up in the air, as some of the recommendations can be carried out by the agencies and some require Congressional action. “It’s a question of priorities. There’s a lot going on on the Hill and at the agencies and the harmonization effort may not be the top priority,” Waldman says.

McPartland questions exactly how much change the harmonization efforts will create and says some of the report’s recommendations could be a hindrance for market participants. “The [report] says both the SEC and CFTC will be the regulators [of the OTC markets] and that’s a nightmare waiting to happen,” he says. “It’s still going to be a very bifurcated regulatory environment. It’s not going to be any different than it was before,” he adds.

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